BMO is paying $17.1-billion for Bank of the West, making it the largest-ever purchase of a U.S. bank by a Canadian one.Chris Wattie/Reuters
Bank of Montreal is making a major splash in the United States with a cash deal to buy Bank of the West for a total purchase price of $20.9-billion, an acquisition that will boost BMO’s American assets by 63 per cent and shift its U.S. geographic base away from the Midwest and toward California.
San Francisco-based Bank of the West is currently owned by French giant BNP Paribas, which is exiting the U.S. retail and commercial banking market with the sale. After adjusting for excess capital on Bank of the West’s balance sheet, which is akin to cash that is sitting around, BMO is paying $17.1-billion, making it the largest-ever purchase of a U.S. bank by a Canadian one.
The acquisition price amounts to 1.5 times Bank of the West’s book value, after accounting for the excess capital. A rule of thumb for bank mergers is that anything over two times book value is seen as paying a rich purchase price. According to regulatory filings, Bank of the West generates a return on equity of 7 per cent, while BMO’s equivalent return in the U.S. is 10 per cent.
The purchase price amounts to roughly 20 per cent of BMO’s current stock market value, and will be largely funded with excess capital BMO has sitting around because Canadian regulators prevented banks from boosting dividends or repurchasing shares for much of the COVID-19 pandemic. These restrictions were recently lifted, and BMO has decided to deploy the capital toward future growth.
The U.S. is currently experiencing a wave of regional bank consolidation as mid-sized lenders bulk up to better compete against the country’s four largest megabanks, which benefit from scale efficiencies and massive technology expense budgets. Recent deals include BB&T Corp.’s US$28-billion all-stock acquisition of SunTrust Banks Inc. in 2019, creating a U.S. southeast powerhouse, and PNC Financial Services Group Inc.’s US$11.6-billion acquisition of BBVA USA Bancshares Inc., the U.S. arm of Spain’s BBVA, completed in 2021.
BMO’s deal is in line with this trend, however, it follows a major jump in U.S. bank valuations, with the KBW Nasdaq Bank Index of stocks in the sector up 32 per cent year-to-date before the purchase was announced.
BMO is also expanding into a region where there is little overlap with its existing operations. Although BMO is doubling the size of its branch network in the U.S. – both banks have roughly 500 branches each – BMO’s branches are predominately located in Illinois and Wisconsin, whereas 70 per cent of Bank of the West’s US$89-billion in deposits are located in California. The bank also has branches in states such as Colorado and Minnesota.
By contrast, BMO’s purchase of Marshall & Ilsley Corp. for US$4.1-billion, completed in 2011, added scale to its existing Midwest footprint, and the purchase was announced in the early days of the economic recovery from the 2008-09 global financial crisis. The timing allowed BMO to purchase M&I cheaply because M&I had a troubled loan book stemming from real estate loans in Florida and Arizona before the crisis.
Yet the new deal will give BMO a solid exposure to the fast-growing West and South in the U.S. Relative to other states, California had one of the lighter hits to gross domestic product in 2020, according to the Bureau of Economic Analysis, and it has been one of the fastest-growing states this year. Illinois, meanwhile, has seen softer growth for much of the past decade.
BMO is also buying a bank with a higher efficiency ratio, a key metric in financial services that measures expenses as a percentage of revenues. Bank of the West’s efficiency ratio is 62 per cent, while BMO’s is 55 per cent in the U.S. If BMO can lower the ratio at Bank of the West, it should boost future earnings.
“We’ve had an interest in this particular bank for a very long time,” BMO chief executive Darryl White said in an interview, adding that often in mergers and acquisitions, “you can’t control your timing.”
While BMO had to wait for a deal, Mr. White said the bank being acquired is, “frankly, better than any opportunity we’ve seen. And we’ve seen a lot of them.”
BMO has also benefited itself from the rise in bank valuations. Before the deal was announced its own shares had climbed 38 per cent since January. BMO’s shares fell 1.9 per cent on the Toronto Stock Exchange Monday.
Bank of the West focuses mostly on consumer and commercial banking, and during an investor call, BMO executives emphasized the commercial opportunities. BMO’s roots are in commercial lending and the bank has been expanding its U.S. commercial business over the past few years by opening offices in metro areas such as Dallas-Fort Worth. Commercial loans comprise 60 per cent of Bank of the West’s loan portfolio, and the new deal will bolster BMO’s business in a way that would take years to build on its own.
“We’ve been in California for over 100 years in the commercial space, but not with the scale they have,” David Casper, U.S. head of BMO Financial Group, said on the call.
As for the retail banking opportunities, BMO said a key goal is to cross-sell acquired clients with existing BMO products, including wealth management offerings.
BMO is also emphasizing cost savings that will come from the acquisition – particularly for technology expenses, because the two banks use a lot of the same vendors.
However, BMO has pledged not to close any acquired branches, which may limit its cost savings. In many bank mergers, branch closings are an important source of cuts.
“No doubt California is an economic juggernaut bigger than all of Canada combined, and Bank of the West has deep roots there. … However, the addition of 514 additional branches (which BMO has pledged not to close despite $860-million in expense synergies) seems like a material change in the bank’s ‘branch-light’ approach,” Bank of Nova Scotia analyst Meny Grauman wrote in a note to clients.
To fund the acquisition, BMO plans to use $9.7-billion of its existing capital, which comes from money sitting on its balance sheet, as well as funds from the sale of its asset management business in Europe, the Middle East and Africa. BMO also expects to generate $3.8-billion in capital over the next year that it will put toward the purchase price – but that money isn’t guaranteed, because economic conditions could affect its profit. Another $2.7-billion will come from selling new shares.
U.S. regulators have recently suggested they are concerned about bank concentration given the recent spate of deals, but Mr. White said BMO is not concerned about getting the necessary approvals. “We think the transaction meets all the requirements for regulatory approval, not just because that would be convenient,” he said on the investor call. To back this up, he cited the minimal concentration of deposits between the two banks, because there isn’t much geographic overlap, and the fact that neither has any financial stability concerns.
BMO first expanded to the U.S. in 1984 by acquiring Chicago-based Harris Bank for $718-million, and doubled down in 2011 by acquiring M&I. Rival Canadian banks have also spent heavily in the U.S. over the past 15 years, with Toronto-Dominion Bank buying Commerce Bancorp Inc. in 2008, Royal Bank of Canada acquiring City National Bank in 2015 and Canadian Imperial Bank of Commerce buying PrivateBancorp Inc. in 2017.
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MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
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